Hubbard Obrien MacroEconomics 2nd edition chapter 18

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Published on October 16, 2014

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Hubbard Obrien MacroEconomics 2nd edition chapter 18

1. Chapter 18 Comparative Advantage, International Trade, and Exchange Rates Is Using Trade Policy to Help U.S. Industries a Good Idea? Trade is, simply, the act of buying or selling. Is there a difference between trade that takes place within a country and international trade? Within the United States, domestic trade makes it possible for consumers in Ohio to eat salmon caught in Alaska or for con-sumers in Montana to drive cars built in Michigan or Kentucky. Similarly, international trade makes it possible for consumers in the United States to drink wine from France or use HD-DVD players from Japan. But one significant difference between domestic trade and international trade is that international trade is more controversial. At one time, nearly all the televisions, shoes, clothing, and toys consumed in the United States were also produced in the United States. Today, these goods are produced mainly by firms in other countries. This shift has benefited U.S. consumers because foreign-made goods have lower prices than the U.S.- made goods they have replaced. But at the same time, many U.S. firms that produced these goods have gone out of business, and their workers have had to find other jobs. Not surprisingly, opin-ion polls show that many Americans favor reducing international trade because they believe doing so would preserve jobs in the United States. But do restrictions on trade actually preserve jobs? In fact, restric-tions on trade may preserve jobs in particular industries, but only at the cost of reducing jobs in other indus-tries. Consider, for example, U.S. pol-icy on imports of sugar and imports of sugar-based ethanol. Ethanol is made from corn or sugar and can be used as a substitute for gasoline as a fuel in automobiles. Sugar is a better base for ethanol than corn because it ferments more quickly and is therefore cheaper to produce. In Brazil, ethanol is made from sugar, but in the United States, ethanol is made from corn. As a result, Brazilian ethanol costs just 80 cents a gallon, about half the cost of ethanol produced in the United States using corn. The Brazilian makers of ethanol would like to ship this cheap fuel to the United States, but the U.S. govern-ment has imposed a 54-cent-per-gallon tariff on imported ethanol. The tariff, combined with the cost of trans-porting the ethanol to the United States, effectively prices Brazilian ethanol out of the market. The tariff helps U.S. firms that produce corn-based ethanol and U.S. farmers who grown corn, but it effec-tively increases fuel costs for many U.S. firms. The higher fuel costs make the products these firms produce more expensive, reducing sales and employment in the industries affected. In addition to the tariff on sugar-based ethanol, Congress has also enacted a sugar quota,which limits the quantity of raw sugar allowed into the United States. Several countries around the world can produce sugar at lower costs than can U.S. sugar pro-ducers. As a result, the world price of sugar, which is the price at which sugar can be bought on the world market, is too low for U.S. sugar companies to cover their costs. The sugar quota allows U.S. companies to sell sugar domestically for a price that is about three times as high as the world price. Without the sugar quota, competition from foreign sugar producers would drive many U.S. producers out of business. But the United States also has a large candy industry, which uses many tons of sugar. The high price of sugar has led many U.S. candy firms to relocate their operations to other countries where the price of sugar is much lower. Life Savers, Star Brite mints, and Cherry Balls are a few of the candies no longer manufactured in the United States. Should the United States have a tariff on imports of sugar-based ethanol and a quota on imports of raw sugar? The tariff and the quota create winners—U.S. producers of corn-based ethanol, U.S. sugar com-panies, and U.S. corn farmers—and losers—U.S. companies that use sugar, their employees, and U.S. con-sumers who must pay higher prices for goods that contain sugar and who are not able to buy low-priced sugar-based ethanol as an alternative to gasoline. In this chapter, we will explore who wins and who loses from international trade and review the political debate over whether interna-tional trade should be restricted. AN INSIDE LOOK AT POLICY on page XXX discusses a recent trade agree-ment between the United States and South Korea.

2. LEARNING Objectives After studying this chapter, you should be able to: 18.1 Discuss the role of international trade in the U.S. economy, page XXX. 18.2 Understand the difference between comparative advantage and absolute advantage in international trade, page XXX. 18.3 Explain how countries gain from international trade, page XXX. 18.4 Analyze the economic effects of government policies that restrict international trade, page XXX. 18.5 Evaluate the arguments over trade policy and globalization, page XXX. 18.6 Explain how exchange rates are determined and how changes in exchange rates affect the prices of imports and exports, page xxx. 599 Economics in YOUR Life! Why Haven’t You Heard of the Sugar Quota? Politicians often support restrictions on trade to convince people to vote for them. The workers in the industries protected by tariffs and quotas are likely to vote for these politicians because the workers think trade restrictions will protect their jobs. But most people are not workers in industries protected from foreign competition by trade restrictions. We have seen that the sugar quota pro-tects U.S. sugar companies and the people who work for them, but this amounts to only a few thou-sand people. Millions of consumers, though, have to pay higher prices for soft drinks, bakery goods, and candy because of the sugar quota. How, then, have sugar companies convinced Congress to enact the sugar quota and why have very few people even heard of the quota? As you read the chapter, see if can answer this question. You can check your answers against those we provide at the end of the chapter. >> Continued on page XXX

3. 600 PA R T 8 | The International Economy 18.1 LEARNING OBJECTIVE Tariff A tax imposed by a government on imports. Imports Goods and services bought domestically but produced in other countries. Exports Goods and services produced domestically but sold to other countries. Markets for internationally traded goods and services can be analyzed using the tools of demand and supply that we developed in Chapter 3.We saw in Chapter 2 that trade in general—whether within a country or between countries—is based on the principle of comparative advantage. In this chap-ter, we look more closely at the role of comparative advantage in international trade.We also use the concepts of consumer surplus, producer surplus, and deadweight loss from Chapter 4 to analyze government policies, such as the sugar quota, that interfere with trade.With this background, we can return to the political debate over whether the United States benefits from international trade. In this chapter we also analyze what determines the exchange rate between the U.S. dollar and other currencies.We begin by looking at how large a role inter-national trade plays in the U.S. economy. 18.1 | Discuss the role of international trade in the U.S. economy. The United States in the International Economy International trade has grown tremendously over the past 50 years. The increase in trade is the result of the falling costs of shipping products around the world, the spread of inexpensive and reliable communications, and changes in government policies. Firms can use large container ships to send their products across the oceans at low cost. Businesspeople today can travel to Europe or Asia using fast, inexpensive, and reliable air transportation. The Internet allows managers to communicate instantaneously and at a very low cost with customers and suppliers around the world. These and other improve-ments in transportation and communication have created a global marketplace that ear-lier generations of businesspeople could only dream of. In addition, over the past 50 years, many governments have changed policies to facil-itate international trade. For example, tariff rates have fallen. A tariff is a tax imposed by a government on imports of a good into a country. Imports are goods and services bought domestically but produced in other countries. In the 1930s, the United States charged an average tariff rate above 50 percent. Today, the rate is less than 2 percent. In North America, most tariffs between Canada,Mexico, and the United States were elimi-nated following the passage of the North American Free Trade Agreement (NAFTA) in 1994. Twenty-seven countries in Europe have formed the European Union, which has eliminated all tariffs among member countries, greatly increasing both imports and exports, which are goods and services produced domestically but sold to other countries. The Importance of Trade to the U.S. Economy U.S. consumers buy increasing quantities of goods and services produced in other coun-tries. At the same time, U.S. businesses sell increasing quantities of goods and services to consumers in other countries. Figure 18-1 shows that since 1950, both exports and imports have been steadily increasing as a fraction of U.S. gross domestic product (GDP). In 1950, exports and imports were both about 4 percent of GDP. In 2007, exports were about 12 percent of GDP, and imports were about 17 percent. Not all sectors of the U.S. economy are affected equally by international trade. For example, although it’s difficult to import or export some services, such as haircuts or appendectomies, a large percentage of U.S. agricultural production is exported. Each year, the United States exports about 50 percent of the wheat crop, 40 percent of the rice crop, and 20 percent of the corn crop. Many U.S. manufacturing industries also depend on trade.About 20 percent of U.S. manufacturing jobs depend directly or indirectly on exports. In some industries, such as computers, the products these workers make are directly exported. In other industries, such as steel, the products are used to make other products, such as bulldozers or

4. C H A P T E R 1 8 | Comparative Advantage, International Trade, and Exchange Rates 601 Figure 18-1 International Trade Is of Increasing Importance to the United States Exports and imports of goods and services as a percentage of total production—measured by GDP—show the importance of interna-tional trade to an economy. Since 1950, both imports and exports have been steadily rising as a fraction of the U.S.GDP. Source: U.S. Department of Commerce, Bureau of Economic Analysis. Figure 18-2 The Eight Leading Exporting Countries The United States is the leading exporting country, accounting for about 10 percent of total world exports. The values are the shares of total world exports of merchandise and commercial services. Source: World Trade Organization, Interna-tional Trade Statistics , 2007. machine tools, that are then exported. In all, about two-thirds of U.S. manufacturing industries depend on exports for at least 10 percent of jobs. U.S. International Trade in a World Context The United States is the largest exporter in the world, as Figure 18-2 illustrates. Six of the other seven leading exporting countries are also high-income countries. Although China is still a relatively low-income country, the rapid growth of the Chinese economy over the past 20 years has resulted in its becoming the third largest exporter. International trade remains less important to the United States than it is to most other countries. Figure 18-3 shows that imports and exports remain smaller fractions of GDP in the United States than in other countries. In some smaller countries, like Belgium, imports and exports make up more than half of GDP. Japan is the only high-income country that is less dependent on international trade than is the United States.

5. 602 PA R T 8 | The International Economy | Making How Expanding International Trade Has Helped Boeing The Boeing 747 jumbo jet was a wonder of modern technology when it was introduced in 1970.With a much wider body than the Connection existing passenger planes, the 747 had two aisles, with as many as 10 seats per row, and could carry more than 500 passengers.Many early models had a second level with a pas-senger lounge, complete with a piano. Its range of more than 5,000 miles made it a truly intercontinental plane. By the late 1990s, however, Boeing, which is based in Chicago and assembles the 747 outside of Seattle, Washington, was experiencing declining sales for the plane. Planes with newer technology were being introduced, and rising prices for jet fuel led some airlines to conclude that jumbo jets were too costly to operate. The decline in pas-senger travel after September 11, 2001, appeared to be the last nail in the 747’s coffin. An executive for Airbus, a European firm that is Boeing’s main com-petitor, boasted, “The 747 is on its last legs. It doesn’t have any legs to stand on. Boeing is trying to breathe life into a 1960s-era design. There is only so much you can do with a plane.”But in the past few years, the 747 has gone through an unexpected revival, spurred largely by recent growth in international trade. In the 1960s, Boeing’s managers made the important decision that the 747 be designed to serve as both a cargo plane and a passenger plane. For example, the nose cone was designed to open to make loading cargo easier. As international trade has grown rapidly in the past few years, so has the demand for the 747 because the plane has larger cargo capacity than other planes. Most low-value goods being shipped long distances—for instance, from China to Europe—are still sent by sea on container ships. However, high-value goods— such as computers, televisions, and some food products—are increasingly likely to be sent by plane, which is a much faster and safer method of shipping. Air freight shipments have been grow-ing at the rapid rate of 6 percent per year. Because of its large carrying capacity, cur-rently about 60 percent of all air freight worldwide is carried on 747s. The latest model, the 747-400, has new, technologically advanced engines and redesigned wings. It has a maximum speed of 675 miles per hour and has a range of more than 7,500 miles—enough to fly nonstop from Los Angeles to Melbourne, Australia. The increased fuel efficiency of the new engines has reduced operating costs. In 2006, Figure 18-3 International Trade as a Percentage of GDP International trade is still less important to the United States than to most other countries, with the exception of Japan. Source: Organization for Economic Coopera-tion and Development. Rapid growth of international trade has spurred demand for the 747 because it has a larger cargo capacity than other planes.

6. C H A P T E R 1 8 | Comparative Advantage, International Trade, and Exchange Rates 603 18.2 LEARNING OBJECTIVE Comparative advantage The ability of an individual, a firm, or a country to produce a good or service at a lower opportunity cost than competitors. Opportunity Cost The highest-valued alternative that must be given up to engage in an activity. Boeing received orders for 67 airplanes worth $16.75 billion. That’s good news for Boeing’s 120,000 employees in the United States. Sources: Leslie Wayne, “Boeing Not Afraid to Say ‘Sold Out,”’ New York Times, November 28, 2006; Leslie Wayne, “Far from Extinct,”New York Times, December 7, 2006; and Leslie Wayne, “Still Flying High,”New York Times, December 25, 2006. YOUR TURN: Test your understanding by doing related problem 1.4 on page XXX at the end of this chapter. 18.2 | Understand the difference between comparative advantage and absolute advantage in international trade. Comparative Advantage in International Trade Why have businesses around the world increasingly looked for markets in other coun-tries? Why have consumers increasingly purchased goods and services made in other countries? People trade for one reason: Trade makes them better off.Whenever a buyer and seller agree to a sale, they must both believe they are better off; otherwise, there would be no sale. This outcome must hold whether the buyer and seller live in the same city or in different countries. As we will see, governments are more likely to interfere with international trade than they are with domestic trade, but the reasons for the inter-ference are more political than economic. A Brief Review of Comparative Advantage In Chapter 2, we discussed the key economic concept of comparative advantage. Comparative advantage is the ability of an individual, a firm, or a country to produce a good or service at a lower opportunity cost than competitors. Recall that opportunity cost is the highest-valued alternative that must be given up to engage in an activity. People, firms, and countries specialize in economic activities in which they have a com-parative advantage. In trading, we benefit from the comparative advantage of other peo-ple (or firms or countries), and others benefit from our comparative advantage. A good way to think of comparative advantage is to recall the example in Chapter 2 of you and your neighbor picking fruit. Your neighbor is better at picking both apples and cherries than you are. Why, then, doesn’t your neighbor pick both types of fruit? Because the opportunity cost to your neighbor of picking her own apples is very high: She is a particularly skilled cherry picker, and every hour spent picking apples is an hour taken away from picking cherries. You can pick apples at a much lower opportunity cost than your neighbor, so you have a comparative advantage in picking apples. Your neigh-bor can pick cherries at a much lower opportunity cost than you can, so she has a com-parative advantage in picking cherries.Your neighbor is better off specializing in picking cherries, and you are better off specializing in picking apples.You can then trade some of your apples for some of your neighbor’s cherries, and both of you will end up with more of each fruit. Comparative Advantage in International Trade The principle of comparative advantage can explain why people pursue different occu-pations. It can also explain why countries produce different goods and services. International trade involves many countries importing and exporting many different goods and services. Countries are better off if they specialize in producing the goods for which they have a comparative advantage. They can then trade for the goods for which other countries have a comparative advantage. We can illustrate why specializing on the basis of comparative advantage makes countries better off with a simple example involving just two countries and two products.

7. 604 PA R T 8 | The International Economy TABLE 18-1 An Example of Japanese Workers Being More Productive Than American Workers Absolute advantage The ability to produce more of a good or service than competitors when using the same amount of resources. OUTPUT PER HOUR OF WORK CELL PHONES DIGITAL MUSIC PLAYERS JAPAN 12 6 UNITED STATES 2 4 Suppose the United States and Japan produce only cell phones and digital music players, like Apple’s iPod. Assume that each country uses only labor to produce each good, and that Japanese and U.S. cell phones and digital music players are exactly the same. Table 18-1 shows how much each country can produce of each good with one hour of labor. Notice that Japanese workers are more productive than U.S.workers in making both goods. In one hour of work, Japanese workers can make six times as many cell phones and one and one-half times as many digital music players as U.S. workers. Japan has an absolute advantage over the United States in producing both goods. Absolute advantage is the ability to produce more of a good or service than competitors when using the same amount of resources. In this case, Japan can produce more of both goods using the same amount of labor as the United States. It might seem at first that Japan has nothing to gain from trading with the United States because it has an absolute advantage in producing both goods. However, Japan should specialize and produce only cell phones and obtain the digitalmusic players it needs by exporting cell phones to theUnited States in exchange for digitalmusic players.The rea-son that Japan benefits from trade is that although it has an absolute advantage in the pro-duction of both goods, it has a comparative advantage only in the production of cell phones. The United States has a comparative advantage in the production of digitalmusic players. If it seems contrary to common sense that Japan should import digital music play-ers from the United States even though Japan can produce more players per hour of work, think about the opportunity cost to each country of producing each good. If Japan wants to produce more digital music players, it has to switch labor away from cell phone production. Every hour of labor switched from producing cell phones to produc-ing digital music players increases digital music player production by 6 and reduces cell phone production by 12. Japan has to give up 12 cell phones for every 6 digital music players it produces. Therefore, the opportunity cost to Japan of producing one more digital music player is 12/6, or 2 cell phones. If the United States switches one hour of labor from cell phones to digital music players, production of cell phones falls by 2, and production of digital music players rises by 4. Therefore, the opportunity cost to the United States of producing one more digital music player is 2/4, or 0.5 cell phone. The United States has a lower opportunity cost of producing digital music players and, therefore, has a comparative advantage in making this product. By similar reasoning, we can see that Japan has a comparative advantage in producing cell phones. Table 18-2 summarizes the opportunity each coun-try faces in producing these goods. TABLE 18-2|The Opportunity Costs of Producing Cell Phones and Digital Music Players The table shows the opportunity cost each country faces in producing cell phones and digital music players.For example,the entry in the first row and second column shows that Japan must give up 2 cell phones for every digital music player it produces. OPPORTUNITY COSTS CELL PHONES DIGITAL MUSIC PLAYERS JAPAN 0.5 digital music player 2 cell phones UNITED STATES 2 digital music players 0.5 cell phone

8. C H A P T E R 1 8 | Comparative Advantage, International Trade, and Exchange Rates 605 18.3 LEARNING OBJECTIVE Autarky A situation in which a country does not trade with other countries. Terms of trade The ratio at which a country can trade its exports for imports from other countries. TABLE 18-3 Production without Trade 18.3 | Explain how countries gain from international trade. How Countries Gain from International Trade Can Japan really gain from producing only cell phones and trading with the United States for digital music players? To see that it can, assume at first that Japan and the United States do not trade with each other. A situation in which a country does not trade with other countries is called autarky. Assume that in autarky each country has 1,000 hours of labor available to produce the two goods, and each country produces the quan-tities of the two goods shown in Table 18-3. Because there is no trade, these quantities also represent consumption of the two goods in each country. Increasing Consumption through Trade Suppose now that Japan and the United States begin to trade with each other. The terms of trade is the ratio at which a country can trade its exports for imports from other countries. For simplicity, let’s assume that the terms of trade end up with Japan and the United States being willing to trade one cell phone for one digital music player. Once trade has begun, the United States and Japan can exchange digital music play-ers for cell phones or cell phones for digital music players. For example, if Japan special-izes by using all 1,000 available hours of labor to produce cell phones, it will be able to produce 12,000. It then could export 1,500 cell phones to the United States in exchange for 1,500 digital music players. (Remember:We are assuming that the terms of trade are one cell phone for one digital music player.) Japan ends up with 10,500 cell phones and 1,500 digital music players. Compared with the situation before trade, Japan has the same number of digital music players but 1,500 more cell phones. If the United States specializes in producing digital music players, it will be able to produce 4,000. It could then export 1,500 digital music players to Japan in exchange for 1,500 cell phones. The United States ends up with 2,500 digital music players and 1,500 cell phones. Compared with the situation before trade, the United States has the same number of cell phones but 1,500 more digital music players. Trade has allowed both countries to increase the quantities of goods consumed. Table 18-4 summarizes the gains from trade for the United States and Japan. By trading, Japan and the United States are able to consume more than they could without trade. This outcome is possible because world production of both goods increases after trade. (Remember that, in this example, our “world” consists of just the United States and Japan.) Why does total production of cell phones and digital music players increase when the United States specializes in producing digitalmusic players and Japan specializes in produc-ing cell phones? A domestic analogy helps to answer this question: If a company shifts pro-duction from an old factory to a more efficient modern factory, its output will increase. In effect, the same thing happens in our example.Producing digitalmusic players in Japan and cell phones in the United States is inefficient. Shifting production to the more efficient country—the one with the comparative advantage—increases total production. The key point is this:Countries gain from specializing in producing goods inwhich they have a compar-ative advantage and trading for goods in which other countries have a comparative advantage. PRODUCTION AND CONSUMPTION CELL PHONES DIGITAL MUSIC PLAYERS JAPAN 9,000 1,500 UNITED STATES 1,500 1,000

9. 606 PA R T 8 | The International Economy TABLE 18-4 The Gains from Trade for Japan and the United States WITHOUT TRADE Production and Consumption CELL MP3 PHONES PLAYERS United States WITH TRADE Production with Trade Trade Consumption with Trade CELL MP3 PHONES PLAYERS Japan United States With trade, the United States and Japan specialize in the good they have a comparative advantage in producing . . . CELL MP3 PHONES PLAYERS CELL MP3 PHONES PLAYERS 12,000 0 0 4,000 Export Import 1,500 1,500 Import Export 1,500 1,500 10,500 1,500 1,500 2,500 9,000 1,500 1,500 1,000 GAINS FROM TRADE 1,500 Cell Phones 1,500 MP3 Players Japan Japan United States Increased Consumption . . . and export some of that good in exchange for the good the other country has a comparative advantage in producing. The increased consumption made possible by trade represents the gains from trade. Why Don’t We See Complete Specialization? In our example of two countries producing only two products, each country specializes in producing one of the goods. In the real world, many goods and services are produced in more than one country. For example, the United States and Japan both produce auto-mobiles. We do not see complete specialization in the real world for three main reasons: • Not all goods and services are traded internationally. Even if, for example, Japan had a comparative advantage in the production of medical services, it would be dif-ficult for Japan to specialize in producing medical services and then export them. There is no easy way for U.S. patients who need appendectomies to receive them from surgeons in Japan. • Production of most goods involves increasing opportunity costs.Recall fromChapter 2 that production of most goods involves increasing opportunity costs. As a result, when the United States devotes more workers to producing digital music players, the opportunity cost of producing more digitalmusic playerswill increase.At some point, the opportunity cost of producing digital music players in the United States may rise to the level of the opportunity cost of producing digitalmusic players in Japan.When that happens, international trade will no longer push the United States further toward complete specialization. The same will be true of Japan: Increasing opportunity cost will cause Japan to stop short of complete specialization in producing cell phones. • Tastes for products differ. Most products are differentiated. Cell phones, digital music players, cars, and televisions—to name just a few products—come with a wide variety of features.When buying automobiles, some people look for reliability and good gasoline mileage, others look for room to carry seven passengers, and still others want styling and high performance. So, some car buyers prefer Toyota Prius hybrids, some prefer Chevy Suburbans, and others prefer BMWs. As a result, Japan, the United States, and Germany may each have a comparative advantage in produc-ing different types of automobiles.

10. C H A P T E R 1 8 | Comparative Advantage, International Trade, and Exchange Rates 607 Don’t Let This Happen to YOU! Remember That Trade Creates Both Winners and Losers The following statement is from a Federal Reserve publica-tion: “Trade is a win–win situation for all countries that participate.” Statements like this are sometimes taken to mean that there are no losers from international trade. But notice that the statement refers to countries, not individu-als. When countries participate in trade, they make their consumers better off by increasing the quantity of goods and services available to them. As we have seen, however, expanding trade eliminates the jobs of workers employed at companies that are less efficient than foreign companies. Trade also creates new jobs at companies that export to for-eign markets. It may be difficult, though, for workers who lose their jobs because of trade to easily find others. That is why in the United States, the federal government uses the Trade Adjustment Assistance program to provide funds for workers who have lost their jobs due to international trade. These funds can be used for retraining, for searching for new jobs, or for relocating to areas where new jobs are available. This program—and similar programs in other countries—recognizes that there are losers from interna-tional trade as well as winners. Source: Quote from Federal Reserve Bank of Dallas Web site, International Trade and the Economy, www.dallasfed.org/educate/everyday/ev7.html. YOUR TURN: Test your understanding by doing related problem 3.12 on page XXX at the end of this chapter. Does Anyone Lose as a Result of International Trade? In our cell phone and digital music player example, consumption increases in both the United States and Japan as a result of trade. Everyone gains, and no one loses. Or do they? In our example, we referred repeatedly to “Japan” or the “United States” producing cell phones or digital music players. But countries do not produce goods—firms do. In a world without trade, there would be cell phone and digital music player firms in both Japan and the United States. In a world with trade, there would only be Japanese cell phone firms and U.S. digital music player firms. Japanese digital music player firms and U.S. cell phone firms would close. Overall, total employment will not change and pro-duction will increase as a result of trade. Nevertheless, the owners of Japanese digital music player firms, the owners of U.S. cell phone firms, and the people who work for them are worse off as a result of trade. The losers from trade are likely to do their best to convince the Japanese and U.S. governments to interfere with trade by barring imports of the competing products from the other country or by imposing high tariffs on them. Where Does Comparative Advantage Come From? Among the main sources of comparative advantage are the following: • Climate and natural resources. This source of comparative advantage is the most obvious. Because of geology, Saudi Arabia has a comparative advantage in the pro-duction of oil. Because of climate and soil conditions, Costa Rica has a comparative advantage in the production of bananas, and the United States has a comparative advantage in the production of wheat. • Relative abundance of labor and capital. Some countries, such as the United States, have many highly skilled workers and a great deal of machinery. Other countries, such as China, have many unskilled workers and relatively little machinery. As a result, the United States has a comparative advantage in the production of goods that require highly skilled workers or sophisticated machinery to manufacture, such as aircraft, semiconductors, and computer software. China has a comparative advantage in the production of goods that require unskilled workers and small amounts of simple machinery, such as children’s toys. • Technology. Broadly defined, technology is the process firms use to turn inputs into goods and services.At any given time, firms in different countries do not all have access to the same technologies. In part, this difference is the result of past investments

11. countries have made in supporting higher education or in providing support for research and development. Some countries are strong in product technologies, which involve the ability to develop new products. For example, firms in the United States have pioneered the development of such products as televisions, digital computers, airliners, and many prescription drugs. Other countries are strong in process tech-nologies, which involve the ability to improve the processes used to make existing products. For example, firms in Japan, such as Toyota and Nissan, have succeeded by greatly improving the processes for designing and manufacturing automobiles. • External economies. It is difficult to explain the location of some industries on the basis of climate, natural resources, the relative abundance of labor and capital, or tech-nology. For example, why does Southern California have a comparative advantage in making movies or Switzerland in making watches or New York in providing financial services? The answer is that once an industry becomes established in an area, firms that locate in that area gain advantages over firms located elsewhere. The advantages include the availability of skilled workers, the opportunity to interact with other firms in the same industry, and being close to suppliers. These advantages result in lower costs to firms located in the area. Because these lower costs result from increases in the External economies Reductions in a size of the industry in an area, economists refer to them as external economies. firm’s costs that result from an increase in the size of an industry. Why Is Dalton, Georgia, the Carpet- Making Capital of the World? Factories within a 65-mile radius of Dalton, Georgia account for 80 percent of U.S. carpet production and more 608 PA R T 8 | The International Economy than half of world carpet production. Carpet production is highly automated and relies primarily on synthetic fibers. Dalton, a small city located in rural northwest Georgia, would not seem to have any advantages in carpet production. In fact, the location of the carpet industry in Dalton was a historical accident. In the early 1900s, Catherine Evans Whitener started making bedspreads using a method called “tufting,” in which she sewed cotton yarn through the fabric and then cut the ends of the yarn so it would fluff up. These bedspreads became very popular. By the 1930s, the process was mechanized and was then applied to carpets. In the early years, the industry used cotton grown in Georgia, but today synthetic fibers, such as nylon and olefin, have largely replaced cotton and wool in carpet manufacturing. More than 170 carpet factories are now located in the Dalton area. Supporting the carpet industry are local yarn manufacturers, machinery suppliers, and mainte-nance firms. Dye plants have opened solely to supply the carpet industry. Printing shops have opened, solely to print tags and labels for carpets. Box factories have opened to produce cartons designed specifically for shipping carpets. The local work-force has developed highly specialized skills for run-ning and maintaining the carpet-making machinery. A company establishing a carpet factory outside the Dalton area is unable to use the suppliers or the skilled workers available to facto-ries in Dalton. As a result, carpet factories located out-side Dalton may have higher costs than factories located in Dalton. Although there is no particular reason why the carpet industry should have originally located in Dalton, Making the | Connection Because Catherine Evans Whitener started making bedspreads by hand in Dalton, Georgia, 100 years ago, a multibillion-dollar carpet industry is now located there.

12. C H A P T E R 1 8 | Comparative Advantage, International Trade, and Exchange Rates 609 external economies gave the area a comparative advantage in carpet making once it began to grow there. YOUR TURN: Test your understanding by doing related problem 3.13 on page XXX at the end of this chapter. Comparative Advantage Over Time: The Rise and Fall—and Rise—of the U.S. Consumer Electronics Industry A country may develop a comparative advantage in the production of a good, and then, as time passes and circumstances change, the country may lose its comparative advantage in producing that good and develop a comparative advantage in producing other goods. For several decades, the United States had a comparative advantage in the production of consumer electronic goods, such as televisions, radios, and stereos. The comparative advantage of the United States in these products was based on having developed most of the underlying technology, having the most modern factories, and having a skilled and experienced workforce. Gradually, however, other countries, particularly Japan, gained access to the technology, built modern factories, and developed skilled workforces. As mentioned earlier, Japanese firms have excelled in process technologies, which involve the ability to improve the processes used to make existing products. By the 1970s and 1980s, Japanese firms were able to produce many consumer electronic goods more cheaply and with higher quality than could U.S. firms. Japanese firms Sony, Panasonic, and Pioneer replaced U.S. firms Magnavox, Zenith, and RCA as world leaders in consumer electronics. By 2008, however, as the technology underlying consumer electronics evolved, compar-ative advantage had shifted again, and severalU.S. firms surged ahead of their Japanese com-petitors. For example,Apple Computer had developed the iPod and iPhone; Linksys, a divi-sion of Cisco Systems, took the lead in home wireless networking technology; and Kodak developed digital cameras with EasyShare software that made it easy to organize, enhance, and share digital pictures.As pictures andmusic converted to digital data, process technolo-gies became less important than the ability to design and develop new products. These new consumer electronics products required skills similar to those in computer design and soft-ware writing,where the United States had long maintained a comparative advantage. Once a country has lost its comparative advantage in producing a good, its income will be higher and its economy will be more efficient if it switches from producing the good to importing it, as the United States did when it switched from producing televisions to importing them. As we will see in the next section, however, there is often political pressure on governments to attempt to preserve industries that have lost their comparative advantage. 18.4 | Analyze the economic effects of government policies that restrict international trade. Government Policies That Restrict International Trade Free trade, or trade between countries that is without government restrictions, makes consumers better off. We can expand on this idea by using the concepts of consumer surplus and producer surplus from Chapter 4. Figure 18-4 shows the market for the bio-fuel ethanol in the United States, assuming autarky, where the United States does not trade with other countries. The equilibrium price of ethanol is $2.00 per gallon, and the equilibrium quantity is 6.0 billion gallons per year. The blue area represents consumer surplus, and the red area represents producer surplus. Now suppose that the United States begins importing ethanol from Brazil and other countries that produce lower-priced sugar-based ethanol and that ethanol is selling in 18.4 LEARNING OBJECTIVE Free trade Trade between countries that is without government restrictions.

13. 610 PA R T 8 | The International Economy Price (dollars per gallon) $2.00 0 U.S. demand Quantity U.S. supply (billions of gallons) 6.0 Consumer surplus Producer surplus those countries for $1.00 per gallon. Because the world market for ethanol is large, we will assume that the United States can buy as much ethanol as it wants without causing the world price of $1.00 per gallon to rise. Therefore, once imports of ethanol are permit-ted into the United States, U.S. firms will not be able to sell ethanol at prices higher than the world price of $1.00, and the U.S. price will become equal to the world price. Figure 18-5 shows the result of allowing imports of ethanol into the United States. With the price lowered from $2.00 to $1.00, U.S. consumers increase their purchases Figure 18-4 The U.S. Market for Ethanol under Autarky This figure shows the market for ethanol in the United States, assuming autarky, where the United States does not trade with other coun-tries. The equilibrium price of ethanol is $2.00 per gallon, and the equilibrium quantity is 6.0 billion gallons per year. The blue area repre-sents consumer surplus, and the red area rep-resents producer surplus. Price (dollars per gallon) 1.00 0 Quantity World price (billions of gallons) 3.0 U.S. demand U.S. supply A G F B E $2.00 Imports Consumer Surplus Producer Surplus Economic Surplus Under Autarky A B + E A + B + E With Imports A + B + C + D E A + B + C + D + E C D 6.0 9.0 Figure 18-5 The Effect of Imports on the U.S. Ethanol Market When imports are allowed into the United States, the price of ethanol falls from $2.00 to $1.00.U.S. consumers increase their purchases from 6.0 billion gallons to 9.0 billion gallons. Equilibrium moves from point F to point G. U.S. producers reduce the quantity of ethanol they supply from 6.0 billion gallons to 3.0 bil-lion gallons. Imports equal 6.0 billion gallons, which is the difference between U.S. consump-tion and U.S. production. Consumer surplus equals the areas A, B, C, and D. Producer sur-plus equals the area E.

14. C H A P T E R 1 8 | Comparative Advantage, International Trade, and Exchange Rates 611 from 6.0 billion gallons to 9.0 billion gallons. Equilibrium moves from point F to point G. In the new equilibrium, U.S. producers have reduced the quantity of ethanol they supply from 6.0 billion gallons to 3.0 billion gallons. Imports will equal 6.0 billion gal-lons, which is the difference between U.S. consumption and U.S. production. Under autarky, consumer surplus would be area A in Figure 18-5.With imports, the reduction in price increases consumer surplus, so it is now equal to the sum of areas A, B,C, and D. Although the lower price increases consumer surplus, it reduces producer surplus. Under autarky, producer surplus was equal to the sum of the areas B and E.With imports, producer surplus is equal to only area E.Recall that economic surplus equals the sum of con-sumer surplus and producer surplus. Moving from autarky to allowing imports increases economic surplus in the United States by an amount equal to the sum of areas C and D. We can conclude that international trade helps consumers but hurts firms that are less efficient than foreign competitors. As a result, these firms and their workers are often strong supporters of government policies that restrict trade. These policies usually take one of two forms: • Tariffs • Quotas and voluntary export restraints Tariffs The most common interferences with trade are tariffs, which are taxes imposed by a gov-ernment on goods imported into a country. Like any other tax, a tariff increases the cost of selling a good. Figure 18-6 shows the impact of a tariff of $0.50 per gallon on ethanol imports into the United States. The $0.50 tariff raises the price of ethanol in the United States from the world price of $1.00 per gallon to $1.50 per gallon.At this higher price,U.S. ethanol producers increase the quantity they supply from 3.0 billion gallons to 4.5 billion gallons. U.S. consumers, though, cut back their purchases of ethanol from 9.0 billion gal-lons to 7.5 billion gallons. Imports decline from 6.0 billion gallons (9 billion − 6 billion) to 3.0 billion (7.5 billion − 4.5 billion). Equilibrium moves from point G to point H. By raising the price of ethanol from $1.00 to $1.50, the tariff reduces consumer sur-plus by the sum of areas A,T,C, andD.Area A is the increase in producer surplus fromthe Loss of Consumer Surplus Price (dollars per gallon) 1.00 0 + Deadweight U.S. price = world = Government + H price + tariff Quantity (billions of gallons) 3.0 U.S. demand U.S. supply World price G C T A D $1.50 Increase in Producer Surplus Tariff Revenue Loss A + C + T + D A T C + D U.S. ethanol consumption Quantity supplied by U.S. firms 4.5 7.5 9.0 Figure 18-6 The Effects of a Tariff on Ethanol Without a tariff on ethanol,U.S. producers will sell 3.0 billion gallons of ethanol, U.S. con-sumers will purchase 9.0 billion gallons, and imports will be 6.0 billion gallons. The U.S. price will equal the world price of $1.00 per gallon. The $0.50-per-gallon tariff raises the price of ethanol in the United States to $1.50 per gallon, and U.S. producers increase the quantity they supply to 4.5 billion gallons.U.S. consumers reduce their purchases to 7.5 bil-lion gallons. Equilibrium moves from point G to point H. The ethanol tariff causes a loss of consumer surplus equal to the area A + C + T + D. The area A is the increase in producer surplus due to the higher price. The area T is the government’s tariff revenue. The areas C and D represent deadweight loss.

15. 612 PA R T 8 | The International Economy higher price. The government collects tariff revenue equal to the tariff of $0.50 per gallon multiplied by the 3.0 billion gallons imported. Area T represents the government’s tariff revenue. Areas C and D represent losses to U.S. consumers that are not captured by any-one. They are deadweight loss and represent the decline in economic efficiency resulting from the ethanol tariff. Area C shows the effect on U.S. consumers of being forced to buy from U.S. producers who are less efficient than foreign producers, and area D shows the effect of U.S. consumers buying less ethanol than they would have at the world price.As a result of the tariff, economic surplus has been reduced by the sum of areas C and D.Recall from Chapter 4 that deadweight loss represents a loss of economic efficiency. We can conclude that the tariff succeeds in helping U.S. ethanol producers but hurts U.S. consumers and the efficiency of the U.S. economy. Quotas and Voluntary Export Restraints A quota is a numeric limit on the quantity of a good that can be imported, and it has an effect similar to a tariff. A quota is imposed by the government of the importing coun-try. A voluntary export restraint (VER) is an agreement negotiated between two coun-tries that places a numeric limit on the quantity of a good that can be imported by one country from the other country. In the early 1980s, the United States and Japan negoti-ated a VER that limited the quantity of automobiles the United States would import from Japan. The Japanese government agreed to the VER primarily because it was afraid that if it did not, the United States would impose a tariff or quota on imports of Japanese automobiles. Quotas and VERs have similar economic effects. The main purpose of most tariffs and quotas is to reduce the foreign competition that domestic firms face.We saw an example of this at the beginning of this chapter when we discussed the sugar quota, which Congress imposed to protect U.S. sugar producers. Figure 18-7 shows the actual statistics for the U.S. sugar market in 2006. The effect of a Quota A numeric limit imposed by a government on the quantity of a good that can be imported into the country. Voluntary export restraint (VER) An agreement negotiated between two countries that places a numeric limit on the quantity of a good that can be imported by one country from the other country. Loss of Consumer Surplus A + C + B + D $2.24 billion Gain by U.S. Sugar Producers A $1.20 billion Gain to Foreign Sugar Producers B $0.35 billion Deadweight Loss C + D $0.69 billion = = + + + + Price (dollars per pound) $0.22 U.S. price of sugar $0.12 World price of sugar 0 Quantity of sugar (billions of pounds) U.S. demand F A C D B E 5.9 23.1 U.S. supply 18.0 21.5 U.S. sugar consumption Quantity supplied by U.S. firms Sugar quota of 3.5 billion pounds Figure 18-7 The Economic Effect of the U.S. Sugar Quota Without a sugar quota, U.S. sugar producers would have sold 5.9 billion pounds of sugar, U.S. consumers would have purchased 23.1 billion pounds of sugar, and imports would have been 17.2 billion pounds. The U.S. price would have equaled the world price of $0.12 per pound. Because the sugar quota limits imports to 3.5 billion pounds (the bracket in the graph), the price of sugar in the United States rises to $0.22 per pound, and U.S. pro-ducers increase the quantity of sugar they sup-ply to 18.0 billion pounds. U.S. consumers reduce their sugar purchases to 21.5 billion pounds. Equilibrium moves from point E to point F. The sugar quota causes a loss of con-sumer surplus equal to the area A + B + C + D. The area A is the gain to U.S. sugar producers. The area B is the gain to foreign sugar produc-ers. The areas C and D represent deadweight loss. The total loss to U.S. consumers in 2006 was $2.24 billion.

16. C H A P T E R 1 8 | Comparative Advantage, International Trade, and Exchange Rates 613 quota is very similar to the effect of a tariff. By limiting imports, a quota forces the domestic price of a good above the world price. In this case, the sugar quota limits sugar imports to 3.5 billion pounds (shown by the bracket in Figure 18-7), forcing the U.S. price of sugar up to $0.22 per pound, or $0.10 higher than the world price. The U.S. price is above the world price because the quota keeps foreign sugar producers from selling the additional sugar in the United States that would drive the price down to the world price. At a price of $0.22 cents per pound, U.S. producers increased the quantity of sugar they supply from 5.9 billion pounds to 18.0 billion pounds, and U.S. consumers cut back their purchases of sugar from 23.1 billion pounds to 21.5 billion pounds. Equilibrium moves from point E to point F. Measuring the Economic Effect of the Sugar Quota Once again, we can use the concepts of consumer surplus, producer surplus, and dead-weight loss to measure the economic impact of the sugar quota.Without a sugar quota, the world price of $0.12 per pound would also be the U.S. price. In Figure 18-7, con-sumer surplus equals the area above the $0.12 price line and below the demand curve. The sugar quota causes the U.S. price to rise to $0.22 cents and reduces consumer sur-plus by the area A + B + C + D.Without a sugar quota, producer surplus received by U.S. sugar producers would be equal to the area below the $0.12 price line and above the sup-ply curve. The higher U.S. price resulting from the sugar quota increases the producer surplus of U.S. sugar producers by an amount equal to area A. A foreign producer must have a license from the U.S. government to import sugar under the quota system. Therefore, a foreign sugar producer that is lucky enough to have an import license also benefits from the quota because it is able to sell sugar on the U.S. market at $0.22 per pound instead of $0.12 per pound. The gain to foreign sugar producers is area B. Areas A and B represent transfers from U.S. consumers of sugar to U.S. and foreign pro-ducers of sugar. Areas C and D represent losses to U.S. consumers that are not captured by anyone. They are deadweight losses and represent the decline in economic efficiency result-ing from the sugar quota. Area C shows the effect of U.S. consumers being forced to buy from U.S. producers that are less efficient than foreign producers, and area D shows the effect of U.S. consumers buying less sugar than they would have at the world price. Figure 18-7 provides enough information to calculate the dollar value of each of the four areas. The results of these calculations are shown in the table in the figure. The total loss to consumers from the sugar quota was $2.24 billion in 2006. About 53 per-cent of the loss to consumers, or $1.20 billion, was gained by U.S. sugar producers as increased producer surplus. About 16 percent, or $0.35 billion, was gained by foreign sugar producers as increased producer surplus, and about 31 percent, or $0.69 billion, was a deadweight loss to the U.S. economy. The U.S. International Trade Commission estimates that eliminating the sugar quota would result in the loss of about 3,000 jobs in the U.S. sugar industry. The cost to U.S. consumers of saving these jobs is equal to $2.24 billion/3,000, or about $750,000 per job. In fact, this cost is an underestimate because eliminating the sugar quota would result in new jobs being created, particularly in the candy industry. As we saw at the beginning of this chapter, U.S. candy companies have been moving factories to other countries to escape the impact of the sugar quota. Solved Problem|18-4 Measuring the Economic Effect of a Quota Suppose that the United States currently both produces and imports apples. The U.S. government then decides to restrict international trade in apples by imposing a quota that allows imports of only 4 million boxes of apples into the United States each year. The figure shows the results of imposing the quota.

17. 614 PA R T 8 | The International Economy Price (dollars per box) $12 10 0 Quantity (millions of boxes) F 6 16 U.S. demand B A C G H I D E J K U.S. supply 10 14 Fill in the following table, using the prices, quantities, and letters in the figure: WITHOUT QUOTA WITH QUOTA World price of apples __________ __________ U.S. price of apples __________ __________ Quantity supplied by U.S. firms __________ __________ Quantity demanded by U.S. consumers __________ __________ Quantity imported __________ __________ Area of consumer surplus __________ __________ Area of producer surplus __________ __________ Area of deadweight loss __________ __________ >> End Solved Problem 18-4 SOLVING THE PROBLEM: Step 1: Review the chapter material. This problem is about measuring the economic effects of a quota, so you may want to review the section “Quotas and Voluntary Export Restraints,”which begins on page XXX, and“Measuring the Economic Effect of the Sugar Quota,” which begins on page XXX. Step 2: Fill in the table. After studying Figure 18-7, you should be able to fill in the table. Remember that consumer surplus is the area below the demand curve and above the market price. WITHOUT QUOTA WITH QUOTA World price of apples $10 $10 U.S. price of apples $10 $12 Quantity supplied by U.S. firms 6 million boxes 10 million boxes Quantity demanded by U.S. consumers 16 million boxes 14 million boxes Quantity imported 10 millions boxes 4 million boxes Area of consumer surplus A + B + C + D + E + F A+ B Area of domestic producer surplus G G+ C Area of deadweight loss No deadweight loss D + F YOUR TURN: For more practice, do related problem 4.14 on page XXX at the end of this chapter.

18. C H A P T E R 1 8 | Comparative Advantage, International Trade, and Exchange Rates 615 18.5 | Evaluate the arguments over trade policy and globalization. The Argument over Trade Policies and Globalization The argument over whether the U.S. government should regulate international trade dates back to the early days of the country. One particularly controversial attempt to restrict trade took place during the Great Depression of the 1930s. At that time, the United States and other countries attempted to help domestic firms by raising tariffs on foreign imports. The United States started the process by passing the Smoot-Hawley Tariff in 1930, which raised average tariff rates to more than 50 percent. As other coun-tries retaliated by raising their tariffs, international trade collapsed. By the end of World War II in 1945, government officials in the United States and Europe were looking for a way to reduce tariffs and revive international trade. To help achieve this goal, they set up the General Agreement on Tariffs and Trade (GATT) in 1948. Countries that joined GATT agreed not to impose new tariffs or import quotas. In addition, a series of multilateral negotiations, called trade rounds, took place, in which countries agreed to reduce tariffs from the very high levels of the 1930s. In the 1940s, most international trade was in goods, and the GATT agreement covered only goods. In the following decades, trade in services and in products incor-porating intellectual property, such as software programs and movies, grew in impor-tance. Many GATT members pressed for a new agreement that would cover services and intellectual property, as well as goods. A new agreement was negotiated, and in January 1995, GATT was replaced by the World Trade Organization (WTO), head-quartered in Geneva, Switzerland.More than 130 countries are currently members of the WTO. Why Do Some People Oppose the World Trade Organization? During the years immediately after World War II, many low-income, or developing, countries erected high tariffs and restricted investment by foreign companies. When these policies failed to produce much economic growth, many of these countries decided during the 1980s to become more open to foreign trade and investment. This process became known as globalization. Most developing countries joined the WTO and began to follow its policies. During the 1990s, opposition to globalization began to increase. In 1999, this oppo-sition took a violent turn at a meeting of the WTO in Seattle,Washington. The purpose of the meeting was to plan a new round of negotiations aimed at further reductions in trade barriers. A large number of protestors assembled in Seattle to meet theWTO dele-gates. Protests started peacefully but quickly became violent. Protesters looted stores and burned cars, and many delegates were unable to leave their hotel rooms. Why would attempts to reduce trade barriers with the objective of increasing income around the world cause such a furious reaction? The opposition to the WTO comes from three sources. First, some opponents are specifically against the globaliza-tion process that began in the 1980s and became widespread in the 1990s. Second, other opponents have the same motivation as the supporters of tariffs in the 1930s—to erect trade barriers to protect domestic firms from foreign competition. Third, some critics of the WTO support globalization in principle but believe that the WTO favors the inter-ests of the high-income countries at the expense of the low-income countries. Let’s look more closely at the sources of opposition to the WTO. Anti-Globalization Many of the protestors in Seattle distrust globalization. Some believe that free trade and foreign investment destroy the distinctive cultures of many countries. As developing countries began to open their economies to imports from the 18.5 LEARNING OBJECTIVE World Trade Organization (WTO) An international organization that oversees international trade agreements. Globalization The process of countries becoming more open to foreign trade and investment.

19. The Unintended Consequences of Banning Goods Made with Child Labor In many developing countries, such as Indonesia, Thailand, and Peru, children as young as seven or eight work 10 or more hours a day. Reports of very young workers laboring long hours, producing goods for export, have upset many people in high-income countries. In the United States, boycotts have been organized against stores that stock goods made in developing countries with child labor. Many people assume that if child workers in developing countries weren’t working in factories making clothing, toys, and other products, they would be in school, as are children in high-income countries. In fact, children in developing countries usually have few good alternatives to work. Schooling is frequently available for only a few months each year, and even children who attend school rarely do so for more than a few years. Poor families are often unable to afford even the small costs of sending their children to school. Families may even rely on the earnings of very young children to survive, as poor families once did in the United States, Europe, and Japan. There is substantial evidence that as incomes begin to rise in poor coun-tries, families rely less on child labor. TheUnited States eventually outlawed child labor, but not until 1938. In developing countries where 616 PA R T 8 | The International Economy United States and other high-income countries, these imports of food, clothing, movies, and other goods began to replace the equivalent local products. So, a teenager in Thailand might be sitting in a McDonald’s restaurant, wearing Levi’s jeans and a Ralph Lauren shirt, listening to a recording by U2 on his iPod, before going to the local movie theater to watch Spider-Man 3. Globalization has increased the variety of products avail-able to consumers in developing countries, but some people argue that this is too high a price to pay for what they see as damage to local cultures. Globalization has also allowed multinational corporations to relocate factories from high-income countries to low-income countries. These new factories in Indonesia, Malaysia, Pakistan, and other countries pay much lower wages than are paid in the United States, Europe, and Japan and often do not meet the environmental or safety reg-ulations that are imposed in high-income countries. Some factories use child labor, which is illegal in high-income countries. Some people have argued that firms with fac-tories in developing countries should pay workers wages as high as those paid in the high-income countries. They also believe these firms should follow the health, safety, and environmental regulations that exist in the high-income countries. The governments of most developing countries have resisted these proposals. They argue that when the currently rich countries were poor, they also lacked environmental or safety standards, and their workers were paid low wages. They argue that it is easier for rich countries to afford high wages and environmental and safety regulations than it is for poor countries. They also point out that many jobs that seem very poorly paid by high-income country standard

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